Ethics in Brief

Ethics in Brief is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association for SDCBA members.

Where an Insurer or Employer Offers to Pay Client’s Fees, But With a Different Attorney, Original Attorney Must Carefully Advise as to Consequences of Rejecting the Offer

When an individual or employee is sued, an employer or insurance company may retain outside counsel to represent that employee or insured.   With important exceptions, Labor Code section 2802 "requires an employer to indemnify an employee who is sued by third persons for conduct in the course and scope of his or her employment, including paying any judgment entered and attorney’s fees and costs incurred in defending the action."  (Cassady v. Morgan, Lewis & Bockius LLP (2006) 145 Cal.App.4th 220, 230.)  Subdivision (a) of section 2802 requires an employer to indemnify its employee “for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.”

An insurer “must defend a suit which potentially seeks damages within the coverage of the policy.” (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275.)  When an insurance company pay for an attorney to defend an insured, but reserves its rights to later seek a determination that no defense was owed to the insured, "the Canons of Ethics impose upon lawyers hired by the insurer an obligation to explain to the insured and the insurer the full implications of joint representation in situations where the insurer has reserved its rights to deny coverage.”  

Significantly, “where there are divergent interests of the insured and the insurer brought about by the insurer's reservation of rights based on possible noncoverage under the insurance policy, the insurer must pay the reasonable cost for hiring independent counsel by the insured. The insurer may not compel the insured to surrender control of the litigation….”  (San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 375.)   The Cumis holding has been codified and partly superseded by statute. (See Civ. Code, § 2860.)

An employee, on the other hand, recently found out the consequences of refusing counsel offered by his employer.  As the result of drinking too much water in an ill-conceived radio contest, a woman died. (Carter v. Entercom Sacramento (August 3rd, 2013) 2013 Cal. App. LEXIS 701, 12 (“Carter”).)  Plaintiff Matt Carter had helped conduct the contest as part of his duties as an employee of defendant Entercom Sacramento, LLC, the company that owned the radio station.  Carter and several other employees were fired after the incident and after a criminal investigation was opened. 

Although Entercom told Carter it would provide legal counsel for him, Carter chose to hire his own attorney. When the woman's family sued Carter (as well as Entercom and others), Carter tendered defense of the action to Entercom's insurer. The insurer accepted the tender without any reservation of rights and appointed a different attorney to represent Carter. Carter refused that attorney and insisted on being represented by the attorney he had chosen.

When the insurer refused to pay for that attorney, Carter filed a cross-complaint against Entercom seeking indemnity under Labor Code section 2802 for the “$807,421.22 in fees and costs” he incurred in defending the action.  The trial court found that none of the fees and costs Carter incurred after the insurer appointed an attorney to represent him were necessary expenditures and therefore Carter was not entitled to indemnity for those fees and costs under section 2802.

The Court of Appeal affirmed noting that section 2802 does not use the word "defend”, but rather an employer’s payment of attorney fees will be required where the employee’s conduct was within the “course of scope” of employment because then defense expenditures “are considered ‘necessary’ within the meaning of the statute and thus subject to the employer's duty to indemnify.”  (Carter, supra, at *12.)  “Necessity is by nature a question of fact…”  (Grissom v. Vons Companies, Inc. (1991) 1 Cal.App.4th 52, 58 [emphasis added].) 

Carter, however, only claimed “Entercom's act of turning [his] defense over to its insurance carrier was inadequate to provide a complete defense to [him]” and “counsel provided by the insurance carrier labored under a conflict of interest” because he “faced both the prospect of criminal charges and punitive damages.”  (Carter, supra, at *23.)  But “Carter points to no reason why it would have been in [insurer’s] interest to pursue a theory that would have subjected Carter to an award of punitive damages, and because [insurer] was liable for any compensatory damages award against Carter, it was in [insuer]'s interest, just as much as (if not more than) it was in Carter's interest, to vigorously defend’ the action on his behalf. (Id. at *25.)  

Clients are entitled to competent, non-conflicted representation. But, whether tendering a defense to an insurance company or employer, counsel must apprise the client of the potential that either entity will not pay for the client’s counsel of choice and carefully weigh if the attorney chose by the insurer or employer actually lacks competence or suffers from a conflict. 

While attorney may desire to continue to be paid by the client in the hope the employer or insurer will eventually be required to pay, it is the client who faces the potential of paying for the entire defense.  At the same time, if the attorney chosen by the insurer or employer does suffer competence or conflict issues, the client needs to be advised and the issues should be addressed so the client may make an informed decision to accept or reject the chosen counsel.  

-- Andrew Servais

**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis. Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**